Pakistan's Economic Dilemma: Growth Fueled by Depleted Buffers Risks Long-Term Instability

Pakistan faces a critical economic juncture where stimulating growth by depleting its fiscal and foreign exchange buffers could yield up to two years of six percent GDP growth. However, this strategy is likened to burning furniture to heat a house, suggesting a temporary solution with potentially devastating long-term consequences. The analysis points to a previous growth episode fueled by buffer depletion between September 2020 and June 2022.

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Burning your buffers to fuel growth is a little like burning your furniture to heat your house.

During this 22-month boom, the fiscal buffer decreased by approximately Rs125 billion per month, totaling Rs2.7 trillion. Concurrently, the reserve buffer diminished by about $130 million monthly, totaling $2.9 billion. A critical detail emerges: the real reserve burn accelerated in August 2021, a year into the boom, escalating to $1 billion per month. This surge was attributed to increased imports, particularly oil, after the initial activation of idle capacity.

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The boom began in September 2020, when the Quantum Index of Manufacturing first turned positive after a long spell in negative territory. It continued for 22 months till June 2022, when it turned negative again.

Following this growth phase, Pakistan entered a 12-month "hangover" period from July 2022 to June 2023. With reserves and fiscal buffers significantly depleted, a sharp economic contraction and a return to the IMF became necessary. This period was marked by substantial debt-related outflows, escalating from $10.8 billion in the first year of the growth boom to $14 billion in the second, and then crossing $18 billion during the hangover phase.

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The fiscal buffer burned by Rs2.7 trillion, roughly Rs125 billion a month of primary deficits, and the reserve buffer burned by $2.9bn, about $130 million a month.

The article suggests that the current situation, exacerbated by a severe power struggle paralyzing decision-making, makes extending the growth horizon beyond the initial two years challenging. The core issue remains the unsustainable practice of using national reserves to artificially inflate growth figures, a strategy that inevitably leads to economic instability.

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From July 2022 the economy was hit by a wave of debt-related outflows since creditors, many of them short-term, refused to roll over their commitments.